Munich Personal RePEc Archive

Policy Treatment and Welfare Considerations in a Stackelberg Economy

Odedoyin, Stephen (2015): Policy Treatment and Welfare Considerations in a Stackelberg Economy.

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Abstract

The paper examines the issue of policy prescriptions and implementation, and how it affects welfare within the context of a Stackelberg market model. The Stackelberg framework considers how modelling a final policy outcome is arrived at in the event of economic reforms in a developing or emerging economy. Given some basic assumptions, the study employed two approaches: a leadership-followership solution of a Stackelberg disequilibrium approach on the one hand and a collusive solution on the other hand in order to arrive at the optimal policy outcome in the context of a duopolistic policy market. While the Stackelberg disequilibrium solution is Pareto optimal, the study shows that the collusive solution improves both intertemporal and static resource allocation, and by implication social welfare. The framework provides an underlying theoretical micro-foundation for policy treatment especially in economies with weak institutions.

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